New FINRA Rules in Force This Week to Protect Senior Investors

Jill Smiley, Director Risk and Compliance

According to the U.S. Census, by 2050, the population age 65 and over is projected to be 83.7 million, almost double the estimated 43.1 million in 2012. In 2015, the Financial Industry Regulatory Authority (FINRA) established a Securities Helpline for Seniors, which highlighted certain issues investment firms were facing with regard to senior investors, and their responses if they suspected a senior investor is subject to financial exploitation by unscrupulous third parties. In response to the highlighted concerns, FINRA issued Regulatory Notice 17-11 in March of 2017, addressing financial exploitation of seniors. The new rules became effective this week on February 5, 2018, and affect  all FINRA Member Firms (“Members”). Every firm and broker that sells securities to the public in the US is required to be licensed and registered by FINRA.

The new rules, which were approved by the Securities and Exchange Commission (SEC), implement two key changes aimed at protecting senior investors. The first is an amendment to Rule 4512 (Customer Account Information) and the second is a new rule, Rule 2165 (Financial Exploitation of Specified Adults).

Trusted Contact Person – Amendment to Rule 4512

The Amendment to Rule 4512 requires FINRA Member Firms to make reasonable efforts to gather information for a “trusted contact person.” The name and contact information of the trusted contact person is to be obtained during account opening or when updating accounts opened after the effective date (February 5, 2018). The trusted contact person is intended to be a resource for the Member in administering the customer’s account, protecting assets and responding to possible financial exploitation. There are several stipulations that are aligned to this amendment:

  • Member Firms must disclose in writing (which may be electronic) to the customer that the Member is authorized to contact the trusted contact person and disclose certain information about the customer’s account.
  • Member Firms are not prohibited from opening an account where the customer fails to provide the information as long as the Member Firm took reasonable efforts to obtain the information.
  • Reasonable efforts to satisfy the rule’s requirements include asking a customer to provide the name and contact information of a trusted contact person.

Temporary Hold on Disbursement of Funds or Securities – New Rule 2165 (SEC approved adoption of FINRA rule)

New Rule 2165 is considered a “safe harbor” from FINRA rules by allowing a Member Firm to withhold funds. Typically, FINRA rules prevent Member Firms from withholding funds. However, under Rule 2165, if a Member Firm reasonably believes that financial exploitation has occurred or has been attempted, it is allowed to place a temporary hold on the disbursement of funds or securities from the account of the specified adult customer. This rule does not come as an obligation to do so, but provides banks the “safe harbor” from standard FINRA rules when they do so. There are several stipulations that come along with this new rule:

  • The customer is a person 65 or older, or 18 or older who the Member Firm believes has a mental or physical impairment that renders the individual unable to protect his or her own interests.
  • A temporary hold may be placed on a suspicious disbursement but not on other, non-suspicious disbursements.
  • The rule does not apply to transactions in securities, only disbursements.
  • The trusted contact person (and other authorized persons) and the customer must be notified of the hold within two business days. However, if the Member believes these individuals were involved in the transaction, notification is not required.
  • The Member Firm must have a reasonable belief of financial exploitation.
  • Financial exploitation includes:
    • The wrongful or unauthorized taking, withholding, appropriation or use of the adult’s funds or securities; or
    • Any act or omission taken by a person, including the use of a power of attorney, guardianship or authority, to obtain control, through deception, intimidation or undue influence, over the adult’s money, assets or property or to convert the adult’s money, assets or property.

FINRA encourages the Member Firms to attempt to resolve the matter of a potential hold with a customer before the action takes place and places significant discretion on the Member Firms in resolving the situation. A Member Firm can terminate a hold after communicating with either the customer or the trusted contact person. In placing or lifting a hold, the firm must take into account a customer’s objection, information obtained during an exchange with the customer or trusted contact person and all other information available.

What Should Member Firms Do To Comply With the New Rule?

When a temporary hold is placed, the Member must immediately initiate an internal review of the facts and circumstances that caused them to reasonably believe financial exploitation applied. The actual hold can last up to 15 business days but can be extended by an additional 10 business days if the internal review supports the belief of financial exploitation.

Member Firms are required to retain records related to compliance with the new rule, which include:

  • Any requests for disbursement that give rise to a temporary hold
  • The finding of financial exploitation that underlies the temporary hold decision and the internal review of the facts and circumstances supporting the belief that the financial exploitation occurred
  • The name and title of the associated person who authorized the temporary hold
  • Notifications to the relevant parties

In addition, the rule requires Member Firms to establish and maintain written supervisory procedures to achieve compliance with the rule. Training policies to ensure compliance or the requirement must be developed and documented.  Member Firms should begin evaluating the impact of these final rules on their existing or planned processes. In doing so, firms must follow prudent regulatory change management and project planning processes to determine whether and how they must enhance their policies, programs and systems to ensure compliance with the technical and operational requirements of the new rules.

Going forward, the challenge for institutions will be to develop the following:

  • Record-keeping capabilities to satisfy current and ongoing rule compliance
  • Policies and procedures to ensure the identification, escalation and reporting of potential, expected or actual abuse
  • Monitoring and reporting the compliance to leadership and regulators
  • Training to ensure a pervasive understanding of policies and procedures for the significant discretion and judgement placed with the Members

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